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What do the Republicans want?
Under the alternative Republican plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages. The government would not have to buy up the toxic mortgage-backed assets that are weighing down financial institutions.
Here is the story. Is this the Jeffrey Ely plan (you heard it here first!)? Do any of you have more information? Does the Paulson-Bernanke rejection of this plan count as a very bad signal about the immediate solvency of major banks?
Posted by Tyler Cowen on September 26, 2008 at 06:57 AM in Sports | Permalink
Comments
The Ely plan calls for the government to buy the mortgages directly. The House plan calls for the government to expand mortgage insurance to cover more of the bad mortgages. When the mortgage default is presented to the insurance company for payment, who comes out owning the mortgage? If the mortgage insurer doesn't come out owning the mortgage, then the House plan is not the same as the Ely plan. Or does Tyler think the Coase fairy will appear? How would that work?
Posted by: ken at Sep 26, 2008 7:31:26 AM
Plans schmans. All I know is, everybody was supposed to get together in Washington and sing Kumbaya. Where's my effing Kumbaya?
Posted by: Mr. Market at Sep 26, 2008 7:32:20 AM
"I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout," said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.
Link
"I think most of what has been said by both campaigns about economic stuff is ill-informed and ill-advised," he said. Asked for specific problems, O'Neill said: "Everything."
"It is possible to re-liquefy the credit system without 'We the People' owning $700 billion worth of homes," he said.
Link
Treasury "is totally dominated by Wall Street investment bankers" and "cannot be relied on to objectively assess" the impact of government policy on the financial industry, Allison wrote in a Sept. 23 letter to Congress. The letter was verified by Bob Denham, a spokesman for BB&T, North Carolina's third- largest bank.
Allison, 60, said Congress should "hear from well-run financial institutions" as lawmakers consider the plan, which seeks to ease the credit crunch by buying troubled mortgage- related assets. Under Allison, Winston-Salem, North Carolina- based BB&T avoided the subprime mortgage market, whose collapse led to the credit crisis. BB&T has risen 26 percent this year, the best showing in the 24-company KBW Bank Index.
Link
Posted by: 8 at Sep 26, 2008 7:33:11 AM
ken, I don't know how the House Republican plan works (I doubt most House Republicans do either), but, under most "mortgage insurance" programs, the defaulted mortgage is sold to the insurer, who is, as we say, "subrogated to the rights of its insured."
Posted by: y81 at Sep 26, 2008 8:38:11 AM
Thanks y81.
Posted by: ken at Sep 26, 2008 8:54:30 AM
I don't get it. If the mortgages are guaranteed, essentially, by the rescue plan, then the toxic securities aren't toxic. Why should this route cost any less than the Paulson plan?
Posted by: Ostrich at Sep 26, 2008 8:58:06 AM
I know that we are all talking about the downside. How about the upside? Which plan is a better deal for US taxpayers if the market recover?
Posted by: Ron at Sep 26, 2008 10:27:49 AM
Are there any updates on the Milton Friedman Institute?
HC
Posted by: Happy Camper at Sep 26, 2008 10:36:58 AM
"Why should this route cost any less than the Paulson plan?"
Economists can give me a smackdown, but is it close enough for government work to say this? At equilibrium they would cost the same. However, right now the loss on the mortgage securities is 100% because noone will buy something they cannot value. Whereas after we know better how many people are actually going to make their payments 100%-X.
Posted by: Andrew at Sep 26, 2008 11:11:47 AM
"Democrats say they would not approve the legislation without a significant number of Republican votes to share in any political fallout from the controversial proposal, which comes just weeks before the November election."
That's all we need to know.
Posted by: D at Sep 26, 2008 11:41:09 AM
One has to suspect that all this rush and the "close-mindedness" to the seemingly more sensible alternatives suggest timing is key and the real mess happening is bigger than it looks. I give that scenario p=.7. Another scenario is that all the rush is designed to evoke a sense of urgency while the insiders know the underlying crisis is not sever enough to justify imprudence, in which case we have to speculate the motivations of the insiders. I give this scenario p=.05. The third scenario is that the urgency is based on a miscalculation of the severity of the situation. I give this p=.25.
Posted by: Yan Li at Sep 26, 2008 11:45:49 AM
What House Republicans want:
Posted by: John B. Chilton at Sep 26, 2008 12:05:10 PM
wow Yan li,
It is hard to believe anyone intelligent enough to read this blog actually comes into the situation giving a .7 probability that a politician is being honest and is acting as a angelic benfactor for the common american taxpayer.
The situations are also vastly oversimplified. Each of the actors has different amounts of awareness and types of motivation.
For specific individuals like Paulson I'd say
p1=.01
p2=.8
p3=.19
...we know he was lying already to a huge degree because they said the world would be over if we didn't get this passed by Thursday!
For a bunch of congressmen I'd bet the p3 is much higher.....but in no case is p1 a .7.
Posted by: Gabe at Sep 26, 2008 12:18:56 PM
Gabe,
It is true that if you are looking at an individual, I might have vastly overestimated the likelihood of his integrity. My estimate here is on the integrity of the collective. It is similar to O-ring issue that had led to the Challenger tragedy. In this case, the probability works to our favor. The collective integrity = 1-p(Paulson lies)*p(Bernanke lies)*P(Bush lies)*...
Bernanke was and is a respected scholar, and a supposedly independent central banker. I make my estimation on his integrity as .8, which implies p(Bernake lies) = .2. Now, plug that number to the above equation. What do you get?
Posted by: Yan Li at Sep 26, 2008 12:38:31 PM
David K. Levine, quoted above, is spot on.
Posted by: David at Sep 26, 2008 12:52:56 PM
Gabe,
Granted I am not American, I am Chinese. My estimate of the integrity of the collective may bear a systematic bias. If you look at the World Value Survey. The Chinese is just about the most trusting people in the world. Our trusting disposition has made us more receptive to, if not even prefer, the authoritarian style of government. It is 5000 years of history coded in my genes. You may challenge my intelligence, but you can't challenge my preference :)
Posted by: Yan Li at Sep 26, 2008 1:03:35 PM
Gabe,
Granted I am not American, I am Chinese. My estimate of the integrity of the collective may bear a systematic bias. If you look at the World Value Survey. The Chinese is just about the most trusting people in the world. Our trusting disposition has made us more receptive to, if not even prefer, the authoritarian style of government. It is 5000 years of history coded in my genes. You may challenge my intelligence, but you can't challenge my preference :)
Posted by: Yan Li at Sep 26, 2008 1:04:21 PM
Yan Li, IMO, Bernanke's renown as a scholar is very suspect...as exemplified by this quote, regarding FDR's economic policies:
“Many of his policies did not work as intended but in the end, FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.”
Bernanke's position appears to be that the failure of free markets caused the Great Depression to last 10 years rather than governments wage & price controls, tarrif & tax increases, and religious persecution of wealthy wall street investors and private business (not to mention arbitrarily setting the price of gold based on whims...he once raised the price of gold by 21¢ because it was a "lucky number")...Take anything Bernanke says with a huge grain of salt. To me it appears that he is apparently now following in FDR's footsteps and going to try "what needs to be done", even when it's not.
Posted by: rvturnage at Sep 26, 2008 2:14:07 PM
What Republicans want is a clear cut issue they can uniformly grandstand on. They are not getting it with the current financial crisis.
Posted by: shecky at Sep 26, 2008 3:23:10 PM
Under the alternative Republican plan, the government would set up an expanded insurance system, financed by the banks, that would rescue individual home mortgages.
Huh? This sounds a lot like the banks insuring themselves. If they could do that they wouldn't be in trouble.
Posted by: Bernard Yomtov at Sep 26, 2008 3:40:58 PM
Do any of you have more information? Does the Paulson-Bernanke rejection of this plan count as a very bad signal about the immediate solvency of major banks?
OK let me be the conspiracy theorist: Tyler, is it possible that the Paulson-Bernanke rejection of the the plan counts as a very bad signal that they are trying to pull off a major heist?
These numbers are mind-boggling. We have to update Eisenhower's term to be "military-industrial-financial complex."
Posted by: Bob Murphy at Sep 26, 2008 3:52:19 PM
Bernanke is respected by some as a scholar. However, there were many widely respected scholars that supported Mao's Great Leap Forward as he oversaw millions being starved to death.
Zbigniew Brzezinski is still a respected political scholar and he brags about encouraging the Chinese to prop up Pol Pot. “I encouraged the Chinese to support Pol Pot"[Blum, 1995; Z Magazine, 1997]
I could go Godwin on this as well but will refrain.
The main thing is that if you are critical of the institution of the Federal Reserve in this country(the USA). You are essentially blacklisted from being a officially "respected scholar". Bernanke knows this and he isn't about to start questioning his paymasters now.
Bernanke does seem like a true believer. The way he obtusely puts forward the argument that "golly gee, the Fed sure did make some dumb mistakes back in 1930, I know they meant well but they just had no idea that suddenly shutting off the money supply and stopping loans after expanding the credit bubble for 12 straight years would cause any problems. I promise we have learned so much and we will print money next time."
This arrogant idea of how stupid bankers were in the 1930's is a little beyond believability for me. Highly intelligent families had been running investment banks for over a hundred years by 1930. The financial elite in 1930 was not so stupid that they could not figure out what happens when credit is escalated upwards for many years and then suddenly shut off. Cascading defualts under such conditions are inevitable. It does not even take a college graduate to understand this.
But if the myth is true and people here have studied it so well then let's here about this character that was the head of the federal reserve in 1930....he must have been the dumbest sumbitch in history. Was he a lumberjack who somehow got appointed to a newfangled banker job? was he a cowboy or some kind of monkey just blindley pulling levers? No! his name was Eugene I. Meyer. He worked for Lazard Freres--his father was a partner there. He headeed the WAR FINANCE CORPORATION for the government in 1917 and developed great realtionships with many bankers in London who were keenly aware of the age old wisdom of buying up cheap assets after credit bublles were intentionally popped. He married Agnes Elizabeth Ernst in 1910; they had five children, including the future Katharine Graham (owner of the propaganda outlet know as the Washington Post).
Posted by: Gabe at Sep 26, 2008 4:11:01 PM
House Republicans got a hot deal they won't let go easily. Think about it. If the situation is really that bad, then their plan has the same advantage as Paulson plan. If Paulson's plan works, then their plan must work too. They got credit. Now, if the situation is not that bad, they're heroes again.
I say, God Bless You, House Republicans. ;)
Posted by: Moo X at Sep 27, 2008 1:33:05 PM
